How Regulators Are Thinking About Distributed Energy Resources

The National Association of Regulatory Utility Commissioners (NARUC) has issued a draft manual on the compensation of distributed energy resources that could influence how regulators across the country design rates and how the U.S. electricity sector evolves.

The document was presented and discussed this week at the NARUC annual meeting in Nashville, Tennessee. According to NARUC President Travis Kavulla of the Montana Public Service Commission, it’s relatively rare for the association to issue a manual. It’s also the first time the association has written a manual specifically on distributed energy resources (DERs), and the first time the association has sought input from outside parties.

“In the past, NARUC hasn’t taken this kind of feedback; we just tasked our experts with writing a manual,” Kavulla said, in an interview. “But we realize this is a subject of some contention and wanted to give people an opportunity to try to frame the issue and frame particular methodologies for our benefit.”

NARUC received nearly 130 stakeholder comments on the draft manual ahead of its release, and is now accepting additional responses through Sept. 2, with plans to release the final version in late November.

The manual addresses the rapidly increasing deployment of distributed energy resources (DERs), which includes solar PV, wind, combined heat and power, energy storage, demand response, electric vehicles, microgrids, and energy efficiency by NARUC’s definition. However, the report has a particular focus on the increasing penetration of net-metered solar — a topic that has pitted utilities and rooftop solar companies against each other.

The manual notes that net metering has created economic pressures, such as utility revenue erosion and cost recovery issues, as well as cost-shifting from DER to non-DER customers. Utilities frequently cite these issues, while solar advocates say net metering is critical to meeting consumer demand for clean energy, especially in nascent solar markets.

Debates fell along traditional lines at the NARUC meeting (video), although some parties underscored their willingness to collaborate. Sean Gallagher, vice president of state affairs at the Solar Energy Industries Association (SEIA), acknowledged that solar companies rely on attaching technology to the grid, which has the potential to fuel conflict or create new opportunities. “We’re in favor of trying to find ways to work through these issues together,” he said.

While the event showed some progress on DER ratemaking solutions, Katherine Hamilton, principal at 38 North Solutions, noted there was also a sense of unease. Environmental groups and other solar advocates are concerned that the NARUC manual is coming together too quickly, and could enshrine a set of policy recommendations that undermine the DER market before it’s fully understood and analyzed.

“Let’s slow down a little bit; let’s not try to ram something through,” Hamilton said on this week’s Energy Gang podcast. “Because if you put something out and say, ‘This is the way it should be done,’ it’s really hard to change it once regulators adopt that.”

Support for cost-benefit studies

The NARUC report doesn’t include any specific recommendations, but does offer commentary on various policy options and factors for regulators to consider when designing rates related to customer-side resources. The current draft is a bit of a mixed bag for DER providers.

In a positive development for DER companies, the manual acknowledges the potential short- and long-term benefits offered by DERs and speaks favorably of conducting comprehensive value of resources (VOR) studies for DER systems to help with ratemaking.

“It is important to value both positive and negative factors for each of the categories of costs/benefits to ensure neutrality,” the guide states. “This method attempts to recognize potential benefits to the grid, other customers, and/or society.”

Solar advocates have fought hard for state regulators to include the benefits of DERs — and not only the costs — in their decision-making. Ahead of the NARUC meeting, a group of solar and tech organizations and companies released a paper describing the range of benefits DERs can provide to all consumers. In comments submitted to NARUC, The Alliance for Solar Choice (TASC) called for long-term studies to explore the value of a given DER and how to fairly compensate it.

The NARUC manual states that because VOR studies value costs and benefits in an inclusive and transparent manner, the results may be more acceptable to all parties. However, there is still a debate to be had over which factors to include in the calculation and how to weigh them.

According to Kavulla, some factors fall outside of the regulatory purview, and gave the example of distributed energy employment studies. “With all due respect to those studies, that’s not how rates are made,” he said, adding that rates do not reflect how many jobs a power plant provides.

“Frankly, some cost-benefit studies might be useful to legislators that want to set policy or decide how big they allow distributed generation to be, but that’s not the game that we’re in,” Kavulla added.

The types of DER benefits regulators are likely to consider are things that affect a customer’s utility bill, including the value of energy production, a resource’s capacity contribution to the grid, and any deferred distribution or transmission investments. The cost of carbon may also be considered in some jurisdictions.

Support for data-driven analysis

In addition to VOR studies, the NARUC manual calls for a detailed analysis on the operations and physical characteristics of a given utility’s distribution system, including the level of DER adoption. “In any evaluation, the utility’s specific characteristics and their most likely reaction to any rate design changes must be clearly and thoroughly determined before questions and challenges from DERs are addressed through ratemaking changes,” the guide states.

This statement seeks to discourage regulators from acting on assumptions. The manual specifically states that jurisdictions with low DER penetration and growth have time to plan and avoid “unnecessary policy reforms simply to follow suit with actions other jurisdictions have taken.”

More than 30 environmental, consumer, low-income and ratepayer advocate groups published a letter to NARUC ahead of the annual meeting with recommendations on the regulatory process, including a call for rate design to be done in a “mindful, holistic way that is informed by substantiating data.” In this respect, the manual document addresses one of the main concerns brought by DER supporters.

“The manual generally urges caution on sweeping rate design reform due to the level of DER penetration in a given state,” said Rusty Haynes, energy policy research manager at EQ Research. “It says you have to look closely at the data and analysis in a utility’s service territory before imposing some sweeping rate design reform.”

“It’s nice to hear NARUC say that,” he said. “We’ve certainly seen several utilities try to impose charges with flimsy data or no data at all.”

Proactive regulatory reform?

Haynes cited Kansas and Oklahoma as examples of states that sought to lower compensation for distributed solar, though solar penetration in those markets is negligible. And in both recent cases, the utilities’ proposed changes were rejected or withdrawn.

Kavulla said that regulators and other stakeholders in states that seek to change DER compensation prematurely could end up paying more for the regulatory proceeding than the total amount of the DER cost shift. However, rates are also meant to convey a forward price signal that encourages people to take a certain action in future.

“Prices in utility ratemaking are used to recover historically invested costs,” he said. “But here it’s a little tricky, because if you really think the utility industry is on the cusp of an epic change, [regulators] probably do want to make sure that prices for the technologies in question are forward-looking — that they represent benefits net of costs over the medium to long run.”

If regulators are looking to stay ahead of the game but also avoid taking early action, Haynes questioned why the NARUC manual didn’t directly address the ability for regulators to proactively initiate broad rate reform proceedings, as with New York’s Reforming the Energy Vision undertaking.

“The alternative is to keep sitting back and watching utility proposals roll in, then having contentious cases that drag on for months and months and drain everybody’s resources,” he said. “That’s one big issue I was surprised not to see in [the manual].”

When the issue was put to Kavulla, he said that some commissions simply don’t have the resources or legal authority to launch their own in-depth proceedings. But he said he wouldn’t be surprised if the majority of jurisdictions begin studying alternative DER compensation methodologies in the near future as the penetration of net-metered devices grows.

“I wouldn’t be surprised over the scope of time to see commissions begin more dockets on [DERs], and this manual is supposed to be useful for those states,” he said.

In the meantime, the manual itself could see more discussion added on New York’s REV proceeding and the compensation proposals submitted to date.

“Many unknowns” of demand charges

One of the favored DER rate changes for utilities in some states, such as Arizona, is to introduce residential demand charges. Demand charges are based on a customer’s highest average usage over a given period of time and can help to reduce peak load, saving customers money. But they’re widely believed to have negative consequences for distributed solar and other DERs.

The NARUC report notes that the success of residential demand charges largely depends on how they are designed and implemented, but in general, there are “many unknowns and uncertainty.”

“If you set a price to encourage or discourage an action, it’s a pretty important consideration whether or not a customer can meaningfully respond to price signals,” said Kavulla. “At the moment, not only do we not necessarily have metering infrastructure to convey that demand cost signal, but people don’t have the kind of retail visibility on their demand consumption that would be necessary in many cases.”

“But if we’re talking about transforming the energy future, it’s probably reasonable to try out pilot projects to test those rate designs,” he added.

At the NARUC meeting, SEIA’s Gallagher said his organization appreciated the association’s treatment of demand charges and generally agrees they are “unproven.” Solar companies are also likely to welcome NARUC’s statement that although higher fixed charges accomplish the goal of utility revenue stability, “they may result in uneconomic or inefficient price signals.”

TASC, one of the most influential rooftop solar advocacy groups, made the case in its NARUC filing that there are better ways to ensure rates match the true value of DERs. The group continued to push for long-term cost-benefit studies and maintaining robust net-metering programs, but also proposed voluntary time-of-use rates and a minimum bill approach as policy tools to bridge the gap between stakeholders.

“TASC is now coming to the table in several states with proactive suggestions for discussions about rate design changes,” Andrew Newbold, public policy manager at Sunrun, wrote in an email. “We are are looking to collaborate and work with key stakeholders to bring positive, fair change for all.”

Earlier this month, the leader of TASC, which is spearheaded by Sunrun, was fired from the position. Bryan Miller led TASC through numerous proceedings and succeeded in upholding pro-solar policies in dozens of states, but was known for taking a hard-line stance. TASC’s comments at NARUC seem to suggest the organization is now taking a more collaborative approach.

Meanwhile, utility stakeholders held fast on their policy positions at the NARUC event. Lisa Wood, executive director of the Edison Foundation’s Institute for Electric Innovation, maintained that net metering is a subsidy and a “zero-sum game,” and insisted that alternatives are necessary. Barbara Lockwood, vice president of regulation for Arizona Public Service, argued in defense of “technology-agnostic” residential demand rates, which she said stand to benefit all ratepayers.

David Owens, executive vice president of business operations and regulatory affairs at the Edison Electric Institute, called on regulators not to rule out any rate options prematurely, underscoring that rates need to focus on equity, revenue stability and transparency.

“None of those [rate] approaches should be taken off the table,” he said at the NARUC town hall last Saturday. “In fact, I would strongly encourage NARUC to continue this discussion, this dialogue and even to expand it a bit to look at the very important issue of integrated distribution system planning.”

More to discuss?

There are a number of other issues that stakeholders may seek to address as they file reply comments to the draft NARUC manual over the coming weeks.

For one thing, the report recommends that regulators consider grandfathering, but does not offer a ringing endorsement of the practice. The manual acknowledges that grandfathering offers customers rate stability and is the most convenient transition solution, but also states that keeping some customers on existing rates may be unfair to others. This finding could be cause for some concern in light of the grandfathering controversy unfolding in Nevada.

Furthermore, the manual raises concerns around predatory lending by DER providers and the need for customer protections, as well as the need for targeted low-income customer programs. These issues aren’t addressed in detail, but could see greater treatment in future discussions.

Some stakeholders may also seek more granularity on NARUC’s definition of DERs and what policy recommendations apply to different DER technologies. The association takes the term to include energy efficiency, combined heat and power systems and energy storage, and yet some of the policy recommendations appear to apply only to rooftop solar. This is relevant when considering a separate rate class for DER customers. Should electric-vehicle owners and households with LED lights be on the same rates as solar customers?

“It seems like NARUC needs to break down the term ‘DERs’ and be more specific with what technologies they’re referring to when they’re advising utility regulators,” said Haynes.

The ability for utilities to own DERs is another issue related to DER compensation, but it isn’t fleshed out in the manual.

“There are policy questions about what degree to allow utilities to enter this market, but that’s another regulatory consideration that doesn’t get comprehensive treatment in the manual because it’s a ratemaking manual alone,” said Kavulla. He added that the issue will likely be flagged in the final version, “but that’s probably a discussion for another day.”

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